Is Silicon Valley on a reviving phase?

Martin Pichinson has never been busier. The co-owner of Sherwood Partners makes his living by helping the financial backers of start-up firms that file for bankruptcy and wind down their operations.

This year, he's helped shut down 30 firms -- more than the total number in 2008. "Business is booming. It's exploding," Pichinson said from his Silicon Valley offices. "It's sad," he added. Venture capitalists and market experts expect the pace of firms that shutdown in the tech industry to accelerate this year, potentially rivaling the dot-com crash, as funding dries up.

Mergers, acquisitions and IPOs are no longer a reliable exit strategy with capital markets tanking and buyers wary. So as in 2000, investors are now putting pressure on their invested firms, forcing them to cut back and save, or just cashing out and cutting their losses. Others say they are hunkering down and awaiting a turnaround and a resumption in deal and IPO activity in 12 to 18 months.

Paul Deninger, vice chairman of investment bank Jefferies & Co in Boston, reckons that about a 10th of the 500 to 1,000 start-ups his institution now tracks nationwide will fail. "The mergers and acquisitions market is firing on four out of eight cylinders," said Deninger, who runs a team that advises on deals. "Are we in a recession or depression? If 18 months from now we're in the same situation as today, then we have a much more serious problem."

To entice investment from a shrinking cash pool, startups now have to come up with fully realized business strategies. Next week, many of Silicon Valley's venture capitalists and chief executives gather near Palm Springs for Demo.Com, a conference showing off undeveloped new products and technology. But unlike in years past, organizers expect many products will be tied to fleshed out business plans and market strategies.

"Companies will present a solid business proposition with a clear path to revenues," promised Chris Shipley, Demo's producer. Last year, many of the start-ups there hoped to "collect a lot of customers and then figure out how to create business value around them. That's not working in the market today." Silicon Valley got a wake-up call in October, when a private slide-presentation put together by well-known VC Sequoia somehow got leaked onto the Internet.

Entitled "RIP Good Times", it forced an already-nervous industry to mull over declarations like "it is different this time," and "recovery will be long," and "spend every dollar as if it were your last." Venture capital funding tanked 71 per cent in the fourth quarter of 2008, but investment hasn't completely vanished. This week alone, Apparent Networks Inc of Massachusetts, which designs software to help firms access networks, raised $12 million from venture firms.

Aveksa Inc, which tailor-makes security software for corporations, secured $10 million. And private equity investor Good Energies invested $20 million in SAGE Electrochromics Inc, a 20 year-old firm that makes glass-coverings to cut heating and lighting costs. But investors are getting pickier, scrutinizing every firm as rigorously as they had in the bubble's aftermath.

Michael Kwatinetz of San Francisco's Azure Capital agreed that the era of "fluffy" investments was over -- not a bad thing if healthier and more fiscally responsible companies emerge. "Get your burn rate under control. Even the best companies are cutting their forward expense rate," Deninger advised.

Agencies

VCs bullish on Indian IT Sector

The year 2009 is slated to be an interesting year for entrepreneurs and venture capitalists (VCs) alike. Even as the global recession continues to haunt industries, many VCs are very bullish on India. A global venture capital firm has invested a sum of Rs 20 crore in Appnomic Systems, an infrastructure management services (IMS) company.

Pramod Haque, managing partner at NVP, a global venture capital fund said, I know this time the recession is different and may take longer time to recover than earlier. But we see tremendous opportunities as an outcome of the recession.

I feel is it is good time to invest in growth equity sectors as the valuations are down. I see more opportunities due to slowdown. But it is true that certain VCs are following a certain trend in the US and fewer companies are getting funded today. I see that trend to continue till end of 2009 or early 2010, he said.

The Bangalore-based Appnomic with operations in India, Middle East and Africa will use the funds to strengthen its existing market presence, expand into the US market and further build out its innovative product and service offerings.

The managed services market is already a mature industry however, the offshoring of infrastructure management services (IMS) to India is still in its infancy. The market opportunities for IMS in India is predicted to be as large as the application development and maintenance sector, said Haque.

The growing pressure on corporations to better handle the complex IT requirements demanded by internal and external regulators is accelerating the need for simplification and efficient management of IT at a low cost, and we believe that about 75% of infrastructure management opportunities can be offshored, said D Padmanabhan, MD & CEO of Appnomic Systems P Ltd. Appnomic has the next generation technology, proven customer traction and seasoned team necessary to capitalize on the growing market needs.

The company started 2.5 years ago has 390 employees and experiencing a 100% growth. The company has about 23 customers in banking, Internet portal sites, BPO and remote management.

I don t feel why the Satyam (SATYAM) incident must dampen our investment plans since even in the US, the Bernard Madoff incident has seen a $50 billion fraud case in the US recently. So incidents like these keep happening but don t affect us in any way.

NVP has made significant investments in India over the years. In fact, we have made about seven or eight direct investments and about 20 cross based operations in India.

Recently the company has invested in three companies Persistent, Adventity and Yatra.